Borrowing soared for low to middle income households in the years leading up to the financial crisis, according to recent research.
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A report by the National Institute for Economic and Social Research (NIESR) found that between 1997 and 2007, rates of expenditure increased faster than the rise in household incomes.
For the lowest income groups, disposable income increased by 17% while spending was more than double that at 43%.
Middle income earners were also forced to spend beyond their means, with income rising by 33% compared to a 46% rise in expenditure. Even the highest earners werenít sheltered from the effects of the economic downturn, with disposable income at 13% and expenditure at 28%.
ìThis research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes,î said Jonathan Portes, director of NIESR.
ìThis doesn’t explain the last crisis or tell us what to do now. But it does, I believe, tell us that income inequality and income distribution matter for macroeconomic policy and the sustainability of growth.î
Recent figures from money charity Credit Action have shown that personal debt has increased in a year on year comparison between March 2011 and March 2012. Outstanding personal debt was £1.451 trillion at the end of March 2011, compared to £1.458 trillion in March this year.
In addition, The Office for Budget Responsibility predicts that total household debt will reach £2.044 trillion in the first quarter of 2017.
Assuming that the number of households in the UK remained the same between now and 2017, this would mean that average household debt would reach £77,719.
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